The result of the US presidential election will have ramifications way beyond its southern border. By Ben Edwards.
While the US presidential election in November could have significant implications for the future of the country, market-watchers in Latin America are also trying to gauge what the implications are for the region if Trump returns to the White House next year.
“The extent of the impact will depend on the policies he is ultimately able to implement, but we do know right off the bat, even if he doesn’t really act on anything, his rhetoric is going to be aggressive, especially against Mexico and probably some other countries in the region, whether it’s Venezuela or those in Central America, so he’s going to be fuelling a lot of financial instability just by being the outspoken president that he was in his first term,” said Joan Domene, chief Latin America economist at Oxford Economics.
The biggest impact would likely be on trade, particularly if Trump engages in a full-on trade war by slapping a 60% tariff on China and 10% on everybody else, including Mexico. That would weigh on growth but it could potentially escalate further if relationships sour and Mexico retaliates, said Domene.
Another potential impact would be on remittance flows and the prospect of Trump imposing a tax on remittances. Mexico alone received US$65bn of remittances from the US last year – the largest remittance pipeline in the world, according to Mastercard.
“This is a very important lifeline that is still coming into Latin America from all the migrants working in the US, and that could be problematic,” said Domene. “That won’t stop remittances, but it might take a hefty chunk out of it.”
Trump’s domestic policies may also cause indirect pain for Latin America. For example, his promises of tax cuts could impact the broader investment backdrop by making US equities more attractive for investors.
“This just means more capital gets sucked into the US and out of the rest of the world,” said Edwin Gutierrez, head of emerging market sovereign debt at abrdn.
The prospect of Trump 2.0 is unlikely to be greeted with too much fanfare in Latin America, though there are some leaders in the region who are more enthusiastic about Trump potentially being back in the White House, including Argentina’s populist president Javier Milei.
“Milei has been very supportive of Trump and his policies, but I’m not sure if he really understands the magnitude of the ripple effect that Argentina might get if Trump gets his way and goes into a full-on trade war, mainly because Argentina is a commodity exporter that is heavily linked to Asia,” said Domene.
While a second Trump presidency might prove disruptive for the region, a Harris victory is not expected to provide a significant boost, rather it is simply a continuation of the status quo.
“There is a big downside to Trump, but there is almost no upside to Harris,” said Domene. “It’s great to have a friendly relationship with the US and Kamala Harris will probably continue that, where we are not getting into public confrontations all the time. Any issues that need to be raised or confronted will be done privately through diplomatic channels without making too much of a fuss about it.”
However, some market-watchers believe the impact may be muted no matter who wins, given the likelihood of one party claiming a clean sweep and controlling the White House, Congress and the Senate is low.
“We think it is going to be a tight race, but what has happened over the last few weeks since Kamala was named the presidential candidate is that the probability of a sweep has decreased, and that reduces the risk of more aggressive international trade policies if Trump gets elected,” said Bertrand Delgado, Latin America strategist at Societe Generale.
To be sure, there will be winners and losers across Latin America if Trump returns to the White House. If he engages in a full-on trade war, Latin America could potentially lose less than advanced economies, though the impact would be uneven across the region.
Mexico, for instance, potentially stands to lose most, said Domene, followed by Central America. Some countries in South America, namely Peru and Chile, could experience a much lower impact or close to none if they can keep exporting in-demand commodities such as copper and lithium, he said.
Mexican stand-off
And while Mexico stands to lose more than other Latin America economies in that scenario, it could benefit over the long term from a shift of manufacturing away from China.
“Mexico could be a beneficiary from a US trade war with China because it should be benefiting from nearshoring, and even though there’s little evidence of that yet, what we’re hearing from companies is that it is coming,” said Gutierrez. “That’s really independent of the elections, but it could actually be accelerated or deepened If Trump were to be elected.”
The outlook is also not clear-cut even if Trump gets elected, given that the broader economic backdrop in the US could have more impact on the region than his trade policy.
“If Trump gets elected, maybe US economic growth will be stronger, but so will inflation and perhaps the push for higher rates, so from the market side, that complicates the picture a little bit,” said Delgado. “But strong US growth is good for Latin America. However, if the fiscal situation deteriorates in the US, that could impact the medium to long-term picture and have implications for funding in the region, as it will significantly cap or reduce appetite for long tenors in Latin America.”
Another potential challenge on the horizon is the upcoming review of the USMCA (US-Mexico-Canada Agreement) in 2026, which could have significant implications for Mexico. Aside from the risk that the US could walk away from the agreement, Trump’s negotiating tactics – such as making threats if certain terms or clauses are not included – could have a negative impact on the Mexican peso.
“That’s bad for Mexicans and their purchasing power abroad, but it’s great for exporters because they become more competitive, so it’s a double-edged sword,” said Domene. “What will probably happen is the central bank will act in the same way they did during the last negotiation in 2018, when the bank feared Trump would just end the trade deal, and they just kept a very hefty interest rate differential to keep inflation expectations under control and keep the flow of capital coming into the country. That could be the case again.”
By contrast, if it is Harris seated at the negotiating table, there could be lower financial volatility and the peso might not depreciate as much, giving Mexico’s central bank more room to lower interest rates, Domene said.
Limited action
Given the level of uncertainty, investors are unlikely to be making any outsized bets on the election’s impact on Latin American assets.
“Everybody’s talking about the US elections, but I don’t think people are necessarily positioning for that, because it is quite binary,” said Gutierrez. “People were handing this election to Trump early on, but elections in the US are not won in the second quarter. This is a 50–50 coin toss, or maybe 52–48. The odds don’t really argue for doing anything too dramatically to position either way, but certainly the knee-jerk reaction with a Trump victory will be there.”
If Trump emerges victorious in November and starts implementing – or at least saying he will implement – his policies, that could prompt investors to reconsider allocating money to the region. In that scenario, FDI flows would likely diminish, there would be more currency weakness across Latin America and risk premiums would inevitably increase on government bond yields, making it more expensive for governments to borrow, said Domene.
A Trump victory would also just inject more uncertainty into the investment backdrop given his more capricious nature, making it a tougher market environment to navigate.
“The concern here is that, if Trump gets elected, then you don’t have much predictability and uncertainty increases in terms of decision-making,” said Delgado. “It is very clear that Harris is more institutional in response to global issues. She has more respect for agreements with the European Union and other partners. And she is less transactional and more predictable, which reduces uncertainty, and that is good for investments going into Latin America.”
Ultimately, the impact of Trump 2.0 on Latin America would hinge entirely on what he actually does if elected rather than his general rhetoric, even if the latter could create disruption in the short term.
“If he doesn’t really implement anything, we can just go about business as usual,” said Domene. “If you remember in the run-up to his first term, every economist said his policies are terrible. But he got in and actually did little of what he threatened he would, while also creating a boost to business sentiment that actually propped up growth in the US, and many countries benefited from that. So, it’s not all bad news until he actually acts on his threats.”
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